BIR World Mirror on Ferrous Metals / Quarterly report - May 2016

It certainly has been a momentous few months since our last report. World steel prices have improved by over US$ 200 per tonne and ferrous scrap prices by over US$ 140. However, before we break out the champagne I think we need to examine the cause of this improvement.

As I have often said, every conversation concerning steel pricing should begin and end with what is happening in China. While many things are unclear, we do know that the Chinese central government has primed the economic pump by adding liquidity which seems to have helped the country’s real estate market. After Chinese New Year, we saw the cancellation of huge quantities of billet and slab orders that has definitely put the buyers of those commodities in a difficult position, at least in the short run.

Additionally, we saw across the globe over 30 trade cases against China that will clearly redirect their exports of finished and semi-finished steel. We continually read about the desire of Chinese leaders to cut back on steel production, and in Hebei province this has actually happened, although how much of it is due to Beijing’s desire to rationalise steel production and how much is due to the flower exhibition is unclear. There have been many mixed signals from China as Baosteel has reported a net profit of US$ 236m and Hebei Iron and Steel announced a profit of US$ 89m for the last quarter; on the other side, Anshan recorded a US$ 95m loss, Baotou an US$ 85 million loss and Hunan Valin a US$ 126m loss while another US$ 154m loss was recorded by Chongqing. Therefore, at best, the outlook is mixed.

Adding to the lack of clarity is the tremendous amount of activity on the Chinese exchanges where the number of contracts traded in three days has exceeded one year of rebar production, so clearly there is a great deal of speculation by some with no stake in the physical market. How much the futures market will affect the physical market is anyone’s guess, but as the famous American philosopher Yogi Barra once said regarding the subject of theory: “There is no difference between theory and practice; however, in practice there is.”

In any event, we all understand that the market that existed at the beginning of the year was unsupportable. The collection system for ferrous scrap broke down at the foundation level and to the point where scrap collection was no longer economically feasible. Now that the prices have increased, this industry is on a much sounder footing - but we are clearly not out of the woods yet.

I look forward to our upcoming Berlin Convention and our panel discussions followed by Q &A during our ferrous session on Monday May 30. We are thrilled to have Jason Schenker, founder and President of Prestige Economics, as our guest speaker. His presentation entitled “Outlook for ferrous markets in a climate of global economic uncertainty” is a must-attend.